Paul L. Caron

Monday, November 1, 2021

Lesson From The Tax Court: Whistleblower Died, But His Claim Survived

Camp (2021)The IRS has long been authorized to award informants a fee for information.  Informants unhappy with their awards, however, have not always had easy access to judicial review.  That changed in 2006 when Congress modified §7623 to permit taxpayers to ask the Tax Court to review “any determination regarding an award.” §7623(b)(4).  Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959.  For a description of how the program works, see Lesson From The Tax Court: The Slippery Slope Of Tax Court Review, TaxProf Blog (Oct. 12, 2020).

Getting that Tax Court determination can take a long, long time.  That is because awards are first determined by the IRS Whistleblower Office (WBO) as a percentage of the proceeds collected from the taxpayer and collection can take a long, long time (hello CDP!).  At the end of all that time, if the whistleblower is not happy with the award, they can petition the Tax Court.  And obtaining a final decision from Tax Court can take a long, long, time as well.  Put those two long processes together and you are easily looking at 20 years from the first blow of the whistle to the final strike of the judicial gavel.

So what happens to the whistleblower’s claim if the whistleblower dies during that long, long time?  In Joseph A. Insinga v. Commissioner, 157 T.C. No. 8 (Oct. 27, 2021) (Judge Gustafson), we learn that a whistleblower’s Estate can continue to assert a claim for an award even after the whistleblower dies.  It's a seemingly simple lesson, but one that not as straightforward as you might expect, requiring the Tax Court to discern and apply common law doctrines.  Details below the fold. 

Law: When Does a Claim Survive The Decedent?
At common law, when a person died, some claims they held against other people were extinguished, but others were not.  Similarly, some claims against a decedent would die with them, while others would survive.  The fancy Latin phrase for the common law doctrine was actio personalis, moritur cum persona (personal actions die with the person).

The Supreme Court explained it this way:

“The personal representatives of a deceased party to a suit cannot prosecute or defend the suit after his death, unless the cause of action, on account of which the suit was brought, is one that survives by law.... [I]f the cause of action dies with the person, the suit abates and cannot be revived. Whether an action survives depends on the substance of the cause of action, not on the forms of proceeding to enforce it.”  Ex Parte Schreiber, 110 U.S. 76, 80 (1884).

Notice the survivability rule works both for claims brought by a decedent’s Estates and for claims brought against a decedent’s Estate.  For a critique of this same/same application of the rule, see Neil V. Getnick, Lesley Ann Skillen and Richard J. Dircks, “Death Cancels Everything But Truth: Survivability of False Claims Act Qui Tam Claims," published privately.  For a great overview of the survivability rule as applied to the False Claims Act, see Vickie Williams, "Dead Men Telling Tales: A Policy-Based Proposal for Survivability of Qui Tam Actions Under the Civil False Claims Act," 83 Neb. L. Rev. 1073 (2005).

At common law, courts were pretty divided on what kind of common law claims survived death and what kind did not.  One distinction was that common law claims that involved the decedent’s personal rights did not survive, but claims involving the decedent’s property, including contractual rights, did survive.  For example, a decedent’s Estate could sue on a debt owed the decedent. See United States v. Daniel, 47 U.S. 11 (1848).  But there was no way, at common law, for a decedent’s Estate, to pursue a civil case for wrongful death.  See Whitford v. the Panama Railroad Company, 23 N.Y. 465 (N.Y. 1861).

But common law is not the only source of law that tells you whether a common law claim survives death.  In the late 1700’’s and early 1800’s, as a result of the industrial revolution and the growth of railroads, the common law rule that wrongful death claims did not survive death seemed increasingly unfair.  States started enacting specific types of statutes to permit that claim, and certain others, to survive death.  You can find details in Note, Inadequacies of English and State Survival Legislation, 48 Harv. L. Rev. 1008 (1935) (sorry, no free link).

Nor is common law the only source of claims.  Federal and state statutes often create causes of action unknown at common law.  Thus, when the question comes up on whether a decedent’s cause of action survives their death, courts will look first for some statutory survival provision and only if they find none will they look to common law.  E.g. Grinblat v. Nulife of Brooklyn, LLC, 20-CV-5854 (EDNY 2021) (federal cause of action under American With Disabilities Act does not survive plaintiff's death).

The common law analysis of whether a statutory cause of action survives death looks to whether the statute is penal or remedial in nature.  A federal cause of action does not die with the decedent if its main purpose is remedial.  But actions that are penal in nature are buried with the decedent.

The leading case for this remedial/penal rule is still Ex Parte Schreiber, 110 U.S. 76 (1884) where the Supreme Court held that an action for copyright infringement was penal because the statute at that time provided half the recovery was to go to the government.  Thus, the private action to recover statutory penalties for violation of the copyright law could not be maintained against the Estate of the deceased defendant.  The Court likened the suit to a Qui Tam action, writing: “The suit was not for the damages the plaintiffs had sustained by the infringement, but for penalties and forfeitures recoverable under the act of congress for a violation of the copyright law.” 110 U.S. at 80.

The remedial/penal rule is a federal common law rule.  Over the years, some courts have used a three-part test to see whether statutory claims fall on the remedial side or penal side, based largely on Murphy v. Household  Fin. Corp., 560 F.2d 206, 209 (6th Cir. 1977), a case evaluating whether a claim granted by the federal Truth In Lending Act survived death.  Here’s how that works:

First, courts evaluate whether a statute’s purpose is to redress individual wrongs or more general wrongs to the public.  If the purpose is to ameliorate public wrongs, then that looks more penal.

Second, courts evaluate whether a monetary recovery under the statute “runs to the harmed individual or to the public.”  Op. at 8-9.  The more a potential recovery goes into the public fisc, the more then claim looks penal.

Third, courts evaluate whether the potential recovery under the statute is out of proportion to the harm suffered by the person asserting the claim.

Courts have used this three-part test in tax cases, to decide whether causes of action created by federal tax statutes survive death.  For example, it turns out the IRS can pursue an action against a taxpayer’s Estate to collect penalties assessed against the taxpayer for failure to file a Foreign Bank and Financial Accounts (FBAR).  United States v. Green, 457 F.Supp.3rd 1262 (SD Fla. 2020).  Similarly, tax shelter promotors who dies, leave their heirs vulnerable to IRS investigation and imposition of §6700 penalties. Reiserer v. United States, 479 F.3d 1160 (9th Cir. 2007) (promoter penalties serve remedial goal of reimbursing the government for the costs in investigating tax fraud and for possible lost tax revenue).

Notice that both the above cases presented the question of whether a taxpayer’s death killed the government’s ability to sue their Estate.  Today’s case presents the question of whether a whistleblower’s death prevents the whistleblower’s Estate from pursuing a claim against the government for a larger award.  The claim is created by §7623, a federal statute.  But nothing in the statute says what happens to the claim when the whistleblower can no longer whistle.  So we need to apply the federal common law remedial/penal rule.

Let’s take a look.

Facts and Lesson
At a time not disclosed in the Opinion, Mr. Insinga blew the whistle on eight taxpayers.  He was unhappy with the IRS Whistleblower Office’s eventual decision on what award he deserved.  So in April 2013 he petitioned for Tax Court review.  When he died in March 2021, the case was still pending on cross-motions for Summary Judgment.

Mr. Insinga’s Estate asked the Tax Court to substitute it as petitioner.  The IRS did not object.  And Tax Court Rule 63(a) permits substitution of parties when one of them dies.

So why is there even an opinion on this?  Well, like every other federal court, the Tax Court can only exercise power (“jurisdiction”) to adjudicate certain claims, as defined by federal statute.  Thus, if Mr. Insinga’s claim did not survive his death then there would be nothing over which the Tax Court could exercise jurisdiction.  No claim, no jurisdiction.  And the parties cannot by agreement create something that does not exist.  So it did not matter that both the Estate and the IRS agreed that Mr. Insinga’s claim survived his death.  The Tax Court needed to make that decision.

After explaining the remedial/penal rule and the three-part test, Judge Gustafson applies it to §7623 as follows.  First, he says “the purpose of the award to redress individual compensating him for the harm he may incur” by blowing the whistle.  The “harm” Judge Gustafson seems to have in mind includes retaliation by an employer or professional ostracism.  Op. at 12.  Second, he notes that the entire recovery goes to the individual whistleblower.  Op. at 13.  Third, he says that because awards are supposed to be based on “the extent to which the individual substantially contributed” to the detection and collection of unpaid taxes, that means “the whistleblower’s recovery is proportional to the harm he incurs in bringing his claim.”  Id.

Accordingly, Mr. Insinga’s claim survived his death and can be pursued by his Estate.

Comment: Trying Too Hard?
I think Judge Gustafson got to the right end point, but I am less sure about the route he took to get there.  Common law analysis requires matching like to like, and neither the Truth In Lending (TILA) statute at issue in Murphy nor a Qui Tam action is similar to the the statute at issue here.

First, whistleblower suits are different from TILA suits.  The TILA claim in Murphy was a typical one: a borrower sues a bank for violation of the disclosure requirements in TILA.  The borrower seeks rescission of the loan, and damages, which include a penalty equal to the interest paid.  In contrast, the whistleblower suit is not directly against the person cheating on their taxes.  It's against the government and the claim is only that the government miscalculated an award.

Second, as I have explained before, whistleblower suits are different from Qui Tam suits.  Similar to a TILA suit, a Qui Tam suit under the False Claims Act asserts that a defendant violated the law and seeks a recovery, part of which goes to the relator and part to the government.  The award to the relator is like a contingency fee for bringing suit against the miscreant.  The private party is suing the miscreant directly (sometimes the government joins and sometimes not).  In contrast, the whistleblower action authorized by §7623(b) claims an award as compensation for giving information, not for bringing suit. It's the government and not the private party that goes after the miscreant.  As we have learned in prior lessons, the whistleblower does not get to work the case.  See Lesson From The Tax Court: Whistleblowers Don’t Get To Work The Case, TaxProf Blog (Nov. 18, 2019).

It is that difference between a Qui Tam claim and a §7623(b) claim that makes Judge Gustafson’s analysis of harm confusing for me.  The award authorized by §7623(a) is based on the value of the information.  It has nothing to do with any “harm” incurred by the whistleblower from third parties.  If the information has no value, there is no award, even if the whistleblower suffers the slings and arrows of outrageous disapprobation and retaliation.  Contrariwise, if the information has great value, there may be a very large award, even if the whistleblower successfully escapes detection by the miscreants and lives quietly on the beach, sipping Margaritas.  I see no basis for the assertion that a whistleblower's award bears any relationship to the alleged "harm he incurs" either in blowing the whistle or in potentially outing himself by suing.

In contrast, a Qui Tam award can at least be rationally linked to retaliation and reputational harms because there the relator is suing the miscreant directly.  Especially if that miscreant is your employer, then yeah, I can see that.  But I still prefer the reasoning of the federal district judge in United States ex rel. Semtner v. Medical Consultants, Inc., 170 F.R.D. 490 (W.D. Okla. 1997).  He refused to apply the Murphy three-part test, noting it was not really suitable for evaluating a Qui Tam action where “the relator is a mechanism of enforcement. The relator’s recovery is not compensation for damages nor is it a penalty to be imposed upon the defendants; it is a lure. Her ultimate claim is not even against the defendants, but against the government for a share of the award.”  Id. at 495 (emphasis supplied).  He still held that the statute at issue was remedial, but not because of the 3-part test.

I think one could do the same here.  In a §7623(b) action, the harm being vindicated by the claim is the harm of too little money!  The claim is that the IRS undervalued the information provided.  It’s not a claim for being harmed by retaliation or otherwise.  Similarly, evaluating whether the amount of money recovered is out of proportion to the “harm” makes no sense to me as applied to §7623.  The defendant in a §7623(b) claim is the government, not the miscreant.  The government is not asked to pay a penalty but to share more of what it has recovered from the miscreant.  The Tax Court is being asked to review whether the government properly evaluated the value of the information given by the whistleblower.  Any recovery awarded is, by definition, exactly proportionate to the harm the whistleblower claims to have suffered: not enough money!

In short, I don't think the Murphy 3-factor test is either necessary or helpful in analyzing whether a §7623(b) claim is remedial.  There is simply not a whiff of penal purpose to the statute.  Its purpose is to give a whistleblower a claim to be made whole.  That’s the classic definition of a remedial statute. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return to TaxProf Blog each Monday for a new Lesson From The Tax Court.

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